Y1 Macroeconomics Flashcards
(192 cards)
1
Q
Name Four main Economic Objectives
A
Low and stable inflation
Real Economic Growth
Low Unemployment
Balance of payments
2
Q
Name three secondary objectives
A
Income distribution (equality) Environmental externalities Balancing budget
3
Q
Measures for Unemployment (2)
A
Claimant Count
Labour Force Survey
4
Q
Why is the LFS usually higher than the Claimant Count? (3)
A
Not all members of a household will claim benefits, while some will still unemployed
- People may be unemployed but not eligible for benefits
- Part time unemployment is included in the LFS
5
Q
What are the criteria for the LFS? (3)
A
Monthly survey of
60,000 households
Uses International Labour Organisation definition of u/e
- looked for work past 4 weeks
- ready to start in 2 weeks
- must be able to work 1 hour/week (so part time included)
6
Q
What is GVA
A
Gross value added (value of out put minus the value of resources used to produce goods and services)
7
Q
How is GDP calculated
A
GVA + taxes - subsidies (it’s a bit more like the actual amount of money in an economy)
8
Q
How do you calculate Real values with indices
A
= nominal * base year/current year
9
Q
National Output is theoretically the same as…
A
National income and national expenditure
10
Q
What is capital depreciation
A
loss in value of capital due to capital consumption and depreciation (over time)
11
Q
GDP + Overseas Production + NET Overseas interest payments and dividends = ?
A
GNI (Gross National Income remember it uses foreign income)
12
Q
What is NPIA
A
Net property income from abroad (international earnings)
13
Q
Why is GNP a better measure than GDP?
A
GNP includes the value of overseas and domestic earnings by citizens of a country (think domestic vs national)
14
Q
NNI (Net National Income) =
A
GNI - depreciation
15
Q
What is the best estimate for a country’s national income
A
Net National Income (NNI) = GVA + taxes - subsidies + NPIA - capital depreciation
= GDP + foreign production + overseas income - depreciation
= GNI - depreciation
16
Q
What type is excluded from National Income calculations and why?
A
Transfer payments as they have no corresponding outputs
17
Q
Name 3 transfer payments
A
government benefits
Aid
Remittances
18
Q
What is the most common value used for comparing country’s national income?
A
GDP pc - accounts for population size and is readily available data
19
Q
Name 5 weaknesses with GDP pc when comparing countries
A
Doesn’t take into account
- Purchasing power (Low GDP countries often have high purchasing power)
- Quality of G+S may differ
- Income distribution is ignored
- Externalities ignored
- Unrecorded Economy may differ in size
20
Q
What is GNP
A
Value of G+S produced domestically and internationally by residents
21
Q
What is the accelerator coefficient equation?
A
Accelerator coefficient = Investment/change in income
22
Q
Name 6 positives of investment
A
Uses profits
Improves effeciency
Raises capicity
Capital can substitute labour (cheaper)
Exploit economies of scale
Provides barrier to entry so start ups can’t compete
23
Q
Net investment =
A
Gross investment - capital depreciation/consumption
24
Q
What is investment in economics?
A
Adding of CAPITAL stock to the economy
25
What is the balance of payments?
Record of all financial dealings between two countries
26
What is the balance of payments split into (and which bit is more important for year 1 macro)
Current Account (Important), capital and financial accounts
27
What is the current balance
Net trade (difference between exports and imports)
28
Current account surplus =
Exports\>Imports
29
Current account deficit =
Imports\>exports
30
Why are current account deficits problems in the long run?
means a country is living beyond its means -leads to debt
31
What is the current account split into?
Visibles (goods) and Invisibles (services), primary and secondary income
32
What is Hot Money?
IR proportional to ER
Higher interest rates increase saving which increases speculative money flows into the UK, appreciating the pound
33
What are Primary and Secondary incomes in the current account?
Primary is investment income
Secondary is transfers between organisations or governments
34
What goes from households to firms in the circular flow model?
Factors of Production, Expenditure
35
What goes from firms to households in the circular flow?
Income, G+S
36
What are the injections?
Investment, Exports, Government spending
37
What are the withdrawals?
Saving, imports, taxes
38
How is inflation measured?
Typical basket of goods (600 items)
Consumer Price Index and Retail Price index
39
What is disinflation?
A decreasing rate of inflation
40
What is Stagflation?
High inflation during a recession
41
What is the opposite of inflation?
Deflation
42
What is Money Illusion?
Wage increase may not equate to a real change in income, yet people feel richer
43
6 Costs of high inflation
Economic disruption as planning is difficult
Less international competitiveness
Redistribution costs (disrupt fixed incomes/taxes)
Shoe-leather costs - money lost as decisions put off
Menu costs - shops have to change prices
Wage Price Spiral - higher wages mean higher prices which mean higher wages etc
44
Types of inflation (2)
Demand pull
Cost push
45
7 causes of unemployment (and brief explanations if you can)
- Frictional (When workers are looking for a new job)
- Seasonal (Certain industries only operate at certain times of year e.g. farming)
- Structural (If an industry is failing workers may find it hard to find work with low transferrable skills)
- Cyclical/demand deficient - (Lack of economic activity due to a recession in AD)
- Real Wage (When sticky wages mean that the wage level is set too high)
- Benefits trap (Workers would rather claim benefits than seek employment)
46
7 Costs of unemployment
Loss of household income - less spending
Emotional difficulties for unemployed
Reduces available capital workers
Employers don’t want the long term unemployed
Can lead to increases crime and violence
Costs the government's large amounts in welfare
Loss of economic output
47
Equations for the multiplier
1/(1-MPC) =
1/(MPW) =
1/(MPT + MPM + MPS)
48
2 examples of supply-side shocks
Commodity price rise
Trade Union wage rise
49
2 Demand-side shocks
Stock Market Crash
IR rise
Sharp pound appreciation
World economic recession
50
What is hysteresis?
When a variable does not return to the same trend when dramatically changed
51
What are the factors of production?
Land, labour, capital, enterprise
52
Name three transfer payments?
Pocket money
2nd hand trade
Government benefits
53
Why is real GDP pc better than just GDP (2)
Real adjust for inflation
pc adjust for population size
54
formula for real
nominal x base year/current year
55
What is inflation
increase in average prices
56
Why is high inflation bad
unstable prices and therefore consumers misinterpret and therefore there is misallocation of resources
57
When is there a current account surplus?
Exports\>imports
58
When is there a current account deficit
Imports\>exports
59
How is the current account deficit financed?
borrowing and selling assets of the general population
60
Equation is Ad
AD = C + I + G +X-M
61
What is the interest effect?
Reason for AD sloping down
- If PL increases people have to borrow more to finance it, this increases demand for loans increasing the cost of money (interest rates), this reduces Consumption and investment therefore AD decreases
62
What is the wealth affect (in terms of AD)?
Reason for AD sloping down
As PL increases, consumer purchasing power decreases reducing RO
63
What is the international effect?
Reason for sloping AD
As PL increase then international competitive decreases and therefore exports decrease reducing AD
64
What are durable and non-durable goods?
Durable - proivdese.g. car
Non-durable - used up or perishes soon after purchase e.g. food
65
What is MPC?
Marginal propensity to consume =
change in consumption/change in income
= dC/dY
66
What is APC
Average propensity to consumer =
C/Y
67
What is the wealth effect?
Large change in asset prices change consumer confidence as they feel wealthier or poorer
68
What is APS
Average propensity to save
= S/Y
69
What is MPS
marginal propensity to save
dS/dY
70
What is the UK APC approx
~90% - high and suggests under investment
71
What is investment?
spending on capital stock
72
What are the positives of investment? (3)
Uses profits
Raises capacity
Capital can substitute labour
Improves efficiency
Exploit economies of scale
Creates barrier to entry
73
Variables that affect investment (5)?
Costs
Interest rates
The rate of economic growth
Business expectations/confidence
World economy
Retained profit
access to credit
government regulations
74
D exogenous
non-economic variables have influence
75
What does "ring-fenced" mean?
When areas of G spending are unlikely to change bc they are too supported
| (i.e. a government would struggle to cut education spending)
76
G and T in a deficit/
G\>T
77
How is a government deficit financed?
Government borrowing
78
What factors affect net trade? (3)
Price (labour/production costs)
Real income - incomes up raise imports
Exchange rate - SPICED
World economy
Protectionism (FREE TRADE)
quality
79
What happens in teh short run
at least one factor of production is fixed
80
Why is the SRAS upward sloping
As price levels increase, business can make more profit so their output increases
81
Why is the SRAS shallow?
As businesses can repsond quickly in the short run to a small increase in price (overtime working for e.g.)
82
What affects SRAS?
Supply side shocks
83
Name some supply side shocks
Wage rates
Raw material prices
taxes
exchange rates
productivity
84
What curve works in a similar way to the LRAS
PPF
85
What cause shifts in the LRAS (5)
Technological advancements
Productivity increase
Education/skills
Regulation
Size of workforce
COmpetition policy
New enterprise
Mobility of FoP
Economic incentives (e.g tax breaks)
Institutional structure (politics)
86
What is the issue with classical LRAS
Doesn't account for long times of mass unemployment
87
What are the types of LRAS?
Classical Keynesian
88
Why is the keynesians model more realistic
Modern economies have minimum wages therefore stopping wages falling very low when labour is in excess supply
89
Events in the economic cycle
Peak/boom
Downturn/contraction
Regression/depression/slump
Recovery/expansion
90
Circular flow equation
O=E=Y
91
Name the injections
Investment
Government spending
Exports
92
Name the withdrawals
saving
taxing
imports
93
What goes from firms to households in the circular flow diagram
Goods and services
Wages/rents/interest/profit
94
What goes from households to firms in circular flow
Expenditure (on G+S)
Land, labour, capital
95
When is an economy in equilibrium
injections=withdrawals
96
what is not necessarily independant in macro?
AD and AS
97
Which side of LRAS is negative output gap
left
98
What is the name for the output gap on the right side of the LRAS
positive
99
Where does an economy always end up long run in classical economics
On the LRAS as LR there is full employment
100
3 equations for the multiplier
1/(1-mpc)
1/mpw
1/(mps+mpt+mpm)
101
Principle of the multiplier
as money flows around an economy it causex a domino effect by boosting NI more than the initial investment
102
What is the negative multiplier effect
What is resultant after a large withdrawal (knock on effects)
103
What are the difficulties with the multiplier (3)
Hard to measure
based on the circular flow model
Not instantaneous
104
Difference between real and nominal
```
Real = adjusted for inflation
Nominal = unadjsuted prices
```
105
What is a transfer payment
movement of money without a corresponding output
106
Difficulties with measuring economic growth? (4)
Statistical innaccuracies
Hidden economy (black market)
Home produced services
Public sector (non marketed goods can be difficult to value)
107
Flaws with comparing NI over time (3)
Population changes
quality may chnage
defence costs are not invested
measures are innacurate
C is SR growth but I is LR growth
income inequality
108
What is a Purchasing power parity
comparison between GDP taking into account cost of living
109
Why is a PPP better than an exchange rate
weaker economies are often undervalued even though their population has a high purchasing power
110
What is wealth?
a stock of assets that produce a flow of income over time
111
What is the easterlin paradox?
Happiness and income only correlate at low incomes
- only relative income matters once necessities are covered
112
Name indicators of happiness? (5)
Economy
personal finace
location
type of work
health
relationships
well being
government trust
education/skills
113
What is stagflation
rising inflation and unemployment
114
definition of a recession
tow sucessive quarters of negative growth
115
Name some demand side shocks (3)
housing bubble burst
stock market crash
sharp IR rise
Sharp tax raise
World economic recession
sharp appreciation in the pound
116
What does actual GDP above the trend line represent?
Output gap positive
- overworked, unsustainable
117
Why is a positive output gap unsustainable in the long run?
Economy is overworked
In the LR workers may demand higher wages for extra hours
118
What is hysterisis?
Variable does not return to its former trend
- e.g. shock creates new trend level
119
Why does economic hysterisis occur?
A shock can cause long term struxtural unemployment
120
What are the factors on the function of output?
Land, labour, capital, technical progress, effeciency
121
How can AD affect long term growth?
An increase in demand by cause the need for business investment
122
How long does it take for a government to double at a growth at
i) 3%
ii) 5%
iii) 10%
i) 25
ii) 14
iii) 7
123
What is sustainable growth?
Must increase productive potential as well as AD
shift AD and LRAS
124
What occurs in unsutainable growth?
Scarce resources and used up and increase in price reducing consumption
suppliers try and find alternatives
consumers switch products
125
impact on consumers and producers of economic growth
Consumer incomes rise over time, may become unequal
Producers - sales increase, but some markets may disappear
126
impact of economic growth on government?
rising tax revenue
rising demand for public goods
127
Impact on environment of economic growth
usually negative but depends on regulation
128
What is reflation
recovering growth after a recession (QE for e.g.)
129
What two measures are used to measure inflation
CPI - consumer price index
RPI - retail price index
130
Is the CPI or RPI usually higher
RPI
131
How is inflation calculated?
using a typical basket of goods (650 items) and their average change in price
items are weighted and then added proportionately
132
2 main causes of inflation?
demand pull
cost push
133
What influences demand pull inflation
increases in C I G or X
decreases in M
134
What causes cost push inflation
increases in costs for firms
increase in regulations
wage changes
135
Costs of high inflation (5)
growth and unemployment (planning difficult)
decreases competitiveness world trade
redistributional costs - real values change dramatically
Price increases are unpopular
Shoe-leather costs - money lost as decisions put off
Menu costs - changing prices
Inflationary noise - ineffecient allocation
Wage price spiral - workers want higher wages which pushes up costs, which means workers need more money etc
136
Problems of deflation (5)
- falling prices encourages people to delay spending as goods will be cheaper in the future
- lowers confidence
- Deflation increases the real value of money → increase in real value of debt → firms and consumers have to spend more on debt repayments → less spending and less investment → decrease AD
- As interest rates can't go below zero deflation means that savings is very attractive so leakages increase and AD decreases
- Can lead to real wage unemployment as the demand for workers decreases but sticky wages persist → increased unemployment
137
Benefits of low, stable inflation (4)
- money illusion (workers think they're getting richer → increase AD)
- AD is steady (unstable inflation leads to big swings)
- doesn't affect saving/fixed income (high inflation leads to savings becoming worthless
- investment can repay long term borrowing (deflation means the value of debt increases massively)
138
What is the money illusion
low inflation causes people to believe that their wages are increasing when they aren't in real terms
139
Causes of unemployment (6)
Frictional
Seasonal
structural
Demand-deficient/cyclical
Real wage
benefits trap
140
What is the benfits trap
people would rather claim benefits then work
141
What is the real wage cause of unemployment
a minimum wage stops firms being able to employ as many people as they want
142
What are three target demographics for governments looking to increase employment
women
older workers
Disabled workers
143
Pros of migration
Fills skills gap
circular flow of income creates jobs
144
Negatives of migration (CoR with 5 chains and what affect could migration have on AD and one counter to this) and one political point
- larger workforce → higher supply of labour → lower equilibrium wage → lower disposable income for workers → lower quality of life (can also lead to lower wealth affects and therefore reduce AD. However, could also lead to an increase in migrant expenditure which leads to a sustained AD)
- put jobs owned by UK citizens under pressure
145
Costs of unemployment (7)
Costs to unemployed:
- emotional
- loss of income → lower QoL
Costs to firms/wider economy
- loss of human capital (→ higher PL for consumers)
- reduced AD and output
Costs to Government/Society
- loss of income and tax revenue
- can lead to crime
- large costs to government in welfare
146
Benefits of small amounts of employment? (3)
- keeps some workforce flexible for new firms to employ at cheaper rates
- too high employment → worker scarcity → wage competition → wage inflation.
Therefore some unemployment can be deflationary
- defers strikes
147
Name top five global trading nations
usa
china
japan
germany
uk
148
What is the balance of payments?
A record of all financial transactions between two countries over a period of time
149
What is the balance of payments spilt up into
curent account
capital and financial account
150
What is the current account?
A record of the inflows and outflows involved in trade and income
151
What are invisibles
intangible services
152
What is a debit in the BoP?
A negative in the balance of payments, such as importing a good or service, or income being paid to an overseas shareholder.
153
Example of invisible credit export
foreigner staying in UK hotel
154
What is a credit on the BoP?
A positive on the balance sheet (money flowing in) such as exporting a good, service, stock or bond
155
Example of invisible debit import?
foreign holiday
156
When something is exported where does the money move? (Fact)
Into the UK
157
Name for net money flowing into the UK
Current account surplus
158
What type of current account does the uk have
deficit
159
Issues of a long term deficit on the current account (6)
- Leads to increased borrowing which is unsustainable
- If foreign investors lose confidence in UK ability to pay back debt → investments removed → large devaluation in currency → decline in living standards and investment
- More assets are sold to keep surplus on cap/fin account → Increasing foreign ownership of assets → long term reduction in income
- Shows economy may be unbalanced
- Indicates economy has low international competitiveness
- large deficit always have the risk that a value of a currency can fall as so much of a currency is being spent
160
Point of Hot money
IR proportional to ER
161
Two parts of demand side policies
Fiscal
Monetary
162
Who desides monetary policy
Monetary policy commitee (9 people chaired by Mark Carney)
Part of Bank of England
Independant from government
163
What are the main types of monetary policy
IR - conventional
QE - unconventional
164
Is a rise interest rates generally regressive or progressive
regressive as the wealthy have larger savings and the poor borrow more
165
What is quantitative easing
Government buys financial assets (usually bonds) with newly printed money to increase borrowing and lending
166
IR target
2% +- 1%
167
What is key to the analysis marks
the transmission mechanism
168
What is government expenditure split into?
Capital
Current
169
How is government expenditure financed?
Taxing and borrowing
170
What is PSNB
Public Sector Net borrowing - government borrowing
171
What is accumulated when PNSB\>tax revenue
Public sector net debt (PSNB)
172
What is the PSNCR
Public sector net cash requirement
173
q.175 what is the current (nov 2017) debt as a percentage of GDP
87.2%
174
What are automatic stabilisers?
Smooth the business cycle with progressive taxes and benefits systems
175
What are the arguments for running a budget deficit
More G and multiplier
Low IR borrow now instead of later
growing economy will be able to cope with future debts
176
Types of fiscal
loosening, tightening
177
What does expansionary fiscal policy do
shift AD out
178
What type of policy can shift AD in
Contractionary demand side poicies
179
Weaknesses of demand-side policies (5)
time lag 1-2 years
Can increase debts
Multiplier has little effects in the short run
Difficult to quantise output gap or multiplier
Very easy to overstimulate economy
180
What would a keynesian economist say about demand side policy
only way out of a recession (diagram)
181
Name some supply side policy (5)
incentives
promoting competition
reforming the labour market
improving labour quality
improving infrastructure
removing red tape
182
Why is supply-side sometimes more advantageous than demand side
long term and deflationary
183
Problems with supply side
can cause output gap
can increase income inequality (cutting min wage)
184
what happens when AD is raised
Increase Real output
Lower unemployment
Inflationary pressure (especially if small output gap)
Reduced international competitiveness → balance of payments deterioration
185
AS shift what happens?
Improve or worsen all 4 main macroeconomic objectives (growth, inflation, employment, balance of payments)
Can have knock on effects on wages and the labour force
186
What are on the axis of the short run Philips Curve
unemployment
Rate of change of moeny wage (inflation)
187
What is key to the trade off?
Where the current equilibrium is on the LRAS (keynesian)
188
What is the accelerator equation
It = a (Yt - Yt-1)
189
How do you calculate the accelerator coefficient
ratio of capital to goods
190
What does the CPI exclude
mortage payments
council tax
tv licences
191
Name of the survey used for inflation calculation
Living costs and food survey (LCF)
192
D productivity
output per unit of input
